Nintendo gets a Pokemon boost but faces a ‘critical’ test with the Switch

Nintendo's third-quarter numbers showed Nintendo's foray into mobile gaming with "Pokemon Go" and "Super Mario Run" is working, but 2017 will be a "critical" year for the Japanese giant to get back into the console market, analysts told CNBC.

The numbers were a mixed bag with sales for the nine months ending December 2016 fell 26.9 percent to 311.1 billion yen ($2.7 billion), while operating income fell 38.1 percent to 26.3 billion yen. Nintendo also chipped its net sales and operating income forecast for its fiscal year ending March 31.

But there were some key bright spots in the numbers which could give investors hope. Nintendo booked a net profit of 64.7 billion yen in its fiscal third quarter, its first quarterly profit in a year. And even more surprisingly, the company said sales of its 3DS handheld games console rose because of Pokemon, something that proves that its mobile strategy is having some success.

For context, In 2015 Nintendo pledged to enter the mobile gaming market. At the time and since then, it has struggled in the console market against the likes of Sony's PlayStation 4 and Microsoft's Xbox one. The Wii U, Nintendo's flagship console, has sold just 13.56 million units since being released in 2012. In comparison, the PlayStation 4 has sold over 50 million units since its release at the end of 2013.

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Pokemon Go players are seen in search of Pokemon and other in game items in Pasadena Playhouse District

Nintendo did not pledge to become a mobile gaming company, but hoped that the titles it does release on smartphones could drive people to its other products. And it seems to be working in part.

"Pokemon Go", developed by Niantic and The Pokemon Company, of which Nintendo owns roughly a third, released the game and it became an instant hit. Since its release in the summer, Nintendo said it has earned 16.7 billion yen from the game, but even more important is that it drove people to its other console.

The handheld 3DS, which is an ageing console, saw sales of 6.45 million units in the nine months to December, a 10 percent year-on-year increase. But two games – "Pokemon Sun" and "Pokemon Moon" – generated sales of 14.69 million units after only being on sale from mid-November.

"The strategy is working. Nintendo sold more 3DS units. People went out and bought out a $180 dollar device just to play Pokemon games. It is clear there was a strong effect of Pokemon Go," Serkan Toto, CEO of consultancy firm Kantan Games, told CNBC by phone on Tuesday.

Even"Super Mario Run", released just on Apple's iOS devices, has generated 78 million downloads globally, but just 5 percent of players have decided to pay the $10 to unlock the full game. Still, Toto said this was "ok for Nintendo" and he expects numbers to increase once the game is released for Android devices in March.

‘Critical’ year for Nintendo

But the cuts to Nintendo's outlook show that mobile games will not pick up the slack for poor console sales, which is why 2017 will be crucial for the company with the upcoming Switch device planned for launch in March.

The hybrid console – which allows people to play the same game in their home or on a portable device – is the Japanese giant's way back into the console market, and it will be hoping that the success around mobile has reinvigorated its brand and will convince consumers to buy the Switch.

"The Switch is critical for Nintendo. Nintendo will have a difficult time if it doesn't work. It's not like in mobile games, if an app doesn't work, you blew $5 million developing it but you move to the next one, but you cannot do that with a console. Nintendo is fixed in its position in the next couple of years in the console cycle, so it's critical for Nintendo to get right," Toto told CNBC.